BCom Notes Part II Banking and Finance
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Islamic Finance
Define Modaraba. Discuss the various types of Modaraba. OR
Define Musharika. Discuss the various types of Musharika.
OR
What do you mean by Qarz-e-Hasana? Discuss in the light of Holy Quran and Hadith.
Introduction
Islam, being a complete religion, has prohibited “riba” or “interest”, in all forms and manifestations in the absence of any blueprint or a workable model of interest free economic system, utmost care with collected gradualness will have to be exercised to bring about a smooth switchover without disrupting the process of capital formation.
Basically, the task of Islamising the financial system revolves around, institutional arrangements, which, on the other hand, reconcile the freedom of the individual with the optimum use of total resources and on the other, do not conflict with the Islamic tenets of equity and fairness. It appears that financial system is based on principles of profit and loss sharing may meet these requirements. While this may cleanse the financial system from the evil of “riba”. Its total elimination will be possible only when the savers earn their income out of “halal” activity and the entrepreneurs do not cross the limits of “halal” business and “halal” profits. Again, an Islamic system would be as much in need of optimum capital formation as any other economic system, be it capitalist or socialist or mixed economy.
As an Islamic state, Pakistan has embarked on the task of building a socio-economic order based on the principles of equity and justice enshrined in the Islamic concept of “Al-Adl-Wal-Ahsan”. A beginning in this direction has been made by introducing Zakat and Ushr in the personal level and eliminating interest from financial transactions at the institutional level.
Modaraba
Modaraba is a form of contract a subscriber (Rabulmal) participates with his money and the manager (Modarib) with his efforts and skills, after setting aside the agreed share of Modarib the profits earned on investments are distributed among the subscribers.
In simple words Modaraba means a business in which a subscriber participates with his money and the manager, as “Modarib” participates with his efforts and skills and profits on investment made out of the Modaraba Funds are distributed among the subscribers. Thus, it is a concept of Islamic finance through which one partner or more participate with funds and another with his skill and efforts in some trade, business and industry permitted by Islam. They are who participates with his efforts assumes the role of manager, while the provider of funds becomes the beneficial owner. In modern terminology, a “modaraba” is akin to the concept of mutual finds minus its unIslamic features. The concept of mutual fund has gained widespread acceptance in the country as is evidenced by the success of N.I.T units and I.C.P Mutual Funds.
Characteristics of Modaraba
1. Under Modaraba Capital of one is combined with the labour of the other to earn something.
2. Both Muslim and non-Muslim can carry business under Modaraba.
3. A special contract is executed for a particular business under Modaraba.
4. A contract for Modaraba may also be verbal.
5. Islam has provided more safety and security to the invested capital in Modaraba as compared to the modern partnership business.
6. Distribution of profit is decided mutually by the subscriber (Rab-ul-Mal) and the manager (Mubarib) that what would be the principle for distributing the profit between themselves.
Types of Modaraba
Modaraba can be broadly classified into two types:
1. Multiple Modaraba
A Modaraba having more than one specific purpose or objective. A company for instance, may float a multipurpose modaraba e.g., for finding a transport service, operating an automobile factory or workship and providing services as packers.
2. Specific Purpose Modaraba
A Modaraba for a specific purpose such as getting up cement plant or building and selling houses, or commercial buildings or industrial structures etc.
For the purpose of regulating the floating and operations of modaraba, a law known as Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980, has already been promulgated by the Federal Government.
Musharika
The word “Musharika” is derived from Arabic word “Shirakat” which means sharing or working together., enjoying equitable participatory and managerial rights and sharing all liabilities and accountability in the equitable proportions. It is a conscious cooperation between two or more persons arising out of free consent and in mutual interest to achieve pre-determined and mutually agreed goals towards which they must work collectively, contribute to collective effort in equitable proportions and share the results success or disaster, in proportions commensurate with their respective contributions to collective efforts, which may comprise of investment of capital, human efforts and skills in varying proportions.
Kinds of Musharika
There are following kinds of Musharika (Shirakat)
1. Shirakat Wajuh
A shirakat under which two or more persons be associated as partners, even without token participation in investment of capital and human effort, with a view to enhancing the public image of the enterprise because of their high standing in the market and/or in society, which could help the enterprise in completing preconditions for rapid take-off and in achieving vigorous expansion in sales.
2. Shirakatul Ainan
Under this all partners contribute to collective efforts in mutually agreed proportions and share the liabilities and accountability for operating results in proportions to their respective contributions. This is also the most common and most feasible form of partnership.
3. Shirakatul Abadan
Under this two or more persons may work towards achieving predetermined and mutually agreed business goals by pooling in their physical and/or mutual labour but without pooling in capital investment. It is obvious that such form of shirakat is feasible only for such business operations whose capital intensity is nil or virtually zero. It is also known shirakatul sinnaia. Under this share of profit may be equal or unequal as agreed among the shariks.
4. Shirakatul Mufawaza
It is a partnership entrancing all monetary resources of the parties to the contract. In equal numbers and involving mutual agency and surety ship on the part of the partners. All partners are jointly and severely liable for the debts of the firm and each partner acts as the agent of the firm, which is also the spirit of the existing Partnership Act. In the contract of shirakatul Mufawaizat only Muslim can participate with other Muslim shariks only and not otherwise.
5. Shirakatul Mazural
It is share cropping, under which land belonging to one person is tilled by another and the produce is shared.
6. Shirakatul Milk
It is the kind of co-ownership due to joint possession of property acquired through inheritance.
Musharika in Banking
Musharika provide working capital funds for industrial and commercial enterprise. Working capital funds are invested in trade, agriculture, purchase of raw material, etc. In case of “Musharika” relationship between banks and customer is of participants and not of creditor and debtor.
Qarz-e-Hasana
Whenever, a man needs money for consumptional purposes, which he hopes to be able to repay at some future time, Islam enjoins that the money should be provided by his more fortunate, neighbor, friends or acquaintances without any interest leaving the debtor to return the money at his convenience. This type of credit is called the worthy credit “qarz-e-hasana” in Islamic terminology.
Qarz-e-hasana has been described in Holy Quran:
If the debtor is suffering from poverty, he must be relaxed to pay Sadaqah or charity, it is very much desirable by Allah.
As mentioned above, Qarz-e-hasana is not given for a specified period, therefore, it is not demanded by the creditor to refund, instead, the debtor is allowed to return the money as he becomes capable of doing this. Holy Quran warns the debtor that as soon as he becomes capable to return the loan, he must refund it to the creditor otherwise he will commit a great sin.
In accordance with a Hadith of Prophet Muhammad (PBUH):
Despite the acquisition of capability of capability to pay Qarz-e-Hasana delaying the payment of the right or receipt is a great sin.
Islam appreciates extension of Qarz-e-hasana and it is declared as ”Loan to Allah” because Allah is the only authority to reward this goodness and the reward given by Allah is the biggest of all rewards given in this world.
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